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© Patrick Fearon 2012
What is Investment Banking?
Patrick FearonAutumn 2012
© Patrick Fearon 20122 IB Grenoble 20122
This year we have split the Banking and Finance Lecture into two:
First Session What is Investment Banking?
Second Session What Careers in Banking and Finance are available outside Investment Banking?
© Patrick Fearon 20123 IB Grenoble 20123
In the Investment Banking lecture this morning we will be looking at:
� Corporate Finance– Financial Advisory– Advice on M&A– Private Equity– Debt Capital Markets Origination (DCM)– Equity Capital Markets Origination (ECM)
� FICC– Sales & Trading– Research
� Equities– Sales & Trading– Research
� Support Functions– Finance– Compliance– Risk (Market, Credit, Operational)– Audit– Operations
� Skills and Opportunities required in Banking
© Patrick Fearon 20124 IB Grenoble 20124
In the “Careers in Finance Outside Investment Banking” lecture this afternoon we will look at:
� Why you might look at a career outside of Investment Banking� Investment Banking careers that can be done outside Investment Banks
– FICC– Equities– M&A– Private Equity
� Wealth Management– Private Banking– Institutional Asset Management
� Corporate Lending– Project Finance– Leveraged Finance– Syndicated Lending– Some of the active Corporate Lending Banks you might consider
� Retail Banking– Domestic and International
� Audit� Governmental Banks
© Patrick Fearon 20125 IB Grenoble 20125
Contents of this morning’s lecture
� Which are the various divisions of an Investment Bank?
� What do those divisions do?
� What would a graduate do in each of those divisions?
� What skills and personality traits are the banks looking for?
© Patrick Fearon 2012
An Overview of Investment Banking
© Patrick Fearon 20127 IB Grenoble 20127
What does an Investment Bank look like?
Securities Services
Trading & Principal
Investments
Investment Banking
Asset & Wealth Management
Corporate
Functions
Source: www.gs.com/careers www.prospect.ac.uk
Debt
Equities
Goldman Sachs International
Sales & Tradingand PrincipalInvestments
© Patrick Fearon 20128 IB Grenoble 20128
But Investment Banks do not all look alike
Corporate
Functions
Source: www.careers.jpmorganchase.com
JP Morgan Chase: A Commercial Bank that has expanded into Investment Banking
© Patrick Fearon 20129 IB Grenoble 20129
Investment Banking
The Commercial Banks that have expanded into Investment Banking
versus The Traditional Investment Banks
© Patrick Fearon 201210 IB Grenoble 201210
The Commercial/Investment Banks versus the Traditional Investment Banks
� The Commercial/Investment Banks:– What were they?– What are they today?
� Highly capitalised and therefore� Able to underwrite and lend significant amounts� Able to lend their own money� Have developed or acquired Investment Banking skills
– Who are they?
© Patrick Fearon 201211 IB Grenoble 201211
The Commercial/Investment Banks versus the Traditional Investment Banks
� The Traditional Investment Banks– How have they changed?– How successful have they been in beating off the challenge
of the Commercial Banks?– To what extent have they had to expand into commercial
banking to compete?– Who are they? Who is left?
© Patrick Fearon 201212 IB Grenoble 2012
This distinction is becoming historical
� The traditional US Investment Banks are now required to structure themselves as bank holding companies
� Increasingly they will be competing for deposits and lending money
� And the governments are legislating against “casino banking” which will limit their trading activities
© Patrick Fearon 201213 IB Grenoble 201213
Investment Banking
Be careful,“Investment Banking” means different things to
different people.
© Patrick Fearon 201214 IB Grenoble 201214
Different definitions of ‘Investment Banking’
Financial Advisory
Advice on M&A
Corporate Lending
Loan Syndication
Debt Capital Markets Origination
Equity Capital Markets Origination
Debt Capital Markets Sales & Trading
Equity Capital Markets Sales & Trading
Debt Capital Markets Research
Equity Capital Markets Research
JP Morgan Morgan Stanley Credit Suisse
Investment Banking
Investment Banking Corporate
Institutional
Institutional Sales & Trading
Research
Source: Banks’ own websites
© Patrick Fearon 201215 IB Grenoble 201215
Different definitions of Investment Banking -Summary
� How a bank defines Investment Banking reflects– the personality of the bank– the power groups or profit centres within the organisation
© Patrick Fearon 201216 IB Grenoble 201216
How to understand the culture of an Investment Bank
� Look at the website/Annual Report/recruiting material� Network to understand the culture� Understand how the bank was put together
– e.g. UBS: merger of UBS/SBC/Warburg/Phillips & Drew– Citi: merger of Salomon/Schroder’s/Citibank/Smith Barney– vs Goldman Sachs which has grown organically
� Is there one business area that drives the Bank?– Merrill Lynch: Sales/creating product to sell to institutions and individuals– JP Morgan: Corporate Finance– Societe Generale: Equity Derivatives
© Patrick Fearon 201217 IB Grenoble 201217
But above all, look at the numbers
Source: Banks’ Annual Reports
26.7
41.0
20.4
30.4
35.4
Global Net Revenues of Investment Banks 2011U
S$
Bill
ions
-Debt and Equity Origination-M&A-Loan Syndication
© Patrick Fearon 201218 IB Grenoble 201218
Investment Banking
A typical Investment Banking deal can involve many areas of the Bank
© Patrick Fearon 201219 IB Grenoble 201219
A typical Investment Banking deal can involve many areas of the bank
CLIENT RELATIONSHIP MANAGER
CorporateFinance
Equities
FICC
Corporate Lending
Corporate Finance
Corporate Finance
Corporate Finance
Loan Syndication
Corporate Finance
EquitySyndicate
FICCSyndicate
LoanSyndication
Sales &Trading
Sales &Trading
Sales &Trading
DIVISIONPRODUCT DELIVERY
PRICING INTO MARKET
© Patrick Fearon 201220 IB Grenoble 201220
A typical Investment Banking deal involves many areas of the bank
� The deal fans out to all the Investment Banking divisions� It moves through each of those divisions from structuring to
pricing to conclusion� In the case of the market-oriented divisions (Debt, Equity and
Loan Syndication) conclusion = Selling/Trading the asset.� The Relationship Manager remains the focal point with the
client throughout� In this example, M&A is the catalyst for a chain reaction of
deals throughout the Investment Bank
© Patrick Fearon 201221 IB Grenoble 201221
What is the future of Investment Banking?
� The regulatory environment with Volcker Rule and Basel 3 in response to the defaults and losses brought about by the crisis will continue to cause changes in the investment banking industry.
� Basel 3 requires banks to raise significant amounts of capital to ensure capital adequacy
� A number of governments (e.g. Switzerland) are putting pressure on local banks to raise capital over and above Basel 3 requirements
� The emphasis of Investment Banks is on developing businesses that are not capital intensive (e.g. Mergers & Acquisitions) as opposed to businesses that are (e.g. commercial lending).
� You should expect to see banks focusing on their core businesses as opposed to being “all things to all men”. (E.g. SocGen Equity Derivatives) to conserve capital
� And this will become more evident as we come out of recession and loan demand increases
© Patrick Fearon 201222 IB Grenoble 201222
What is the future of Investment Banking?
� Volcker Rule prevents banks from undertaking activities that are deemed to be speculative
And therefore,
� Activities like Proprietary Trading fall foul of the Volcker Rule and are being floated off into hedge funds (e.g. Goldman Sachs).
� The emphasis of banks is increasingly on “plain vanilla” flow trading� The problem is that these high risk activities can also be high profit� With the result that Investment Banks are being pushed towards more
commoditised, low-profit activities � Moreover, flow business will increasingly move on to exchanges, which will
mean Investment Banks will have more competition in flow product activities and, therefore, lower earnings.
© Patrick Fearon 201223 IB Grenoble 201223
What does this mean for banking careers?
� The market is increasingly dividing between Investment Banks/Brokers (fee business), Hedge Funds, Private Equity (risk takers) and Third Party money managers (AM, PB).
� What you’re seeing is a combination of pressure on bank earnings and greater capital requirements, and, therefore, lower returns on Equity.
� Bank bonuses will inevitably be curbed and careers in Banking will be less well remunerated than they have been.
© Patrick Fearon 201224 IB Grenoble 201224
What kind of positive market signs do you see?
Very few this year
� Almost every area of Investment Banking activity had a disastrous quarter in either Q1 or Q2 of 2012
� M&A was down 16% in the first 9 months of this year. � New issues were down 14% in Equities. � Only Debt is showing an improvement – up 4%� Commercial Lending is down 26%. � Nevertheless, at this stage the recruiters are saying that they intend
to recruit the same number of MSc’s as last year.
© Patrick Fearon 201225 IB Grenoble 201225
The market remains extremely cautious
� Much of Europe has slipped into a double dip recession� The US has lost its triple-A credit rating, which triggered a flight
to quality. In January, S&P down-graded Italy, Spain, France and Austria.
� Concerns about eurozone credit, inflation and recession persist, and even the future viability of the Euro
� Several rounds of lay-offs in the Investment Banking divisions have been initiated.
� There is still some hiring going on within front office investment banking divisions (but more within alternative financial services sectors and internal control functions like risk management).
.
http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm
© Patrick Fearon 2012
A detailed look at Investment Banking
© Patrick Fearon 201227 IB Grenoble 201227
Investment Banking involves four main activities
� Corporate Finance– Financial Advisory– Advice on M&A– Private Equity– Debt Capital Markets Origination– Equity Capital Markets Origination
� FICC– Sales & Trading– Research
� Equities– Sales & Trading– Research
� Support Functions– Finance– Compliance– Risk (Market,Credit, Operational)– Audit– Operations
� Skills and Opportunities required in Banking
© Patrick Fearon 201228 IB Grenoble 201228
What does Corporate Finance mean?
� It’s an Advisory Activity focused on changes of ownership and raising capital to finance those changes.
� Mergers and Acquisitions, Equity Capital Markets, Debt Capital Markets are some of the main activities.
� M&A team can represent the defending or the acquiring company� Can refer to any “Corporate Development” including Management
Buy Outs and Joint Ventures� Also general financial advice to corporates� Most banks view this as an international business and will have units
in at least New York, London, Tokyo and Hong Kong (sometimes Latin America, Australia) to follow global clients’ international activities.
© Patrick Fearon 201229 IB Grenoble 201229
How is a Corporate Finance department structured?
Corporate Advisory Group M&A
Debt/EquityOrigination
• Often houses the Relationship managers that are split into industry specialists:
• Financial Institutions Group
• Telecoms & Media
• Oil & Gas
• Healthcare
• Real Estate
• Etc.
• Advise on mergers and acquisitions, joint ventures and other corporate development actions.
• Finding target buyers or sellers.
Corporate Solutions
• The solutions team, may work with any of the other teams to come up with derivative add-on products that will permit the bank to obtain more margin and allow clients to complete risk hedging solutions strategy within one institution.
• Underwriting new equity/bond issues.
© Patrick Fearon 201230 IB Grenoble 201230
What would a graduate do in Corporate Finance?
� Client wants to make an acquisition– Analysts evaluate potential candidates
� Corporate Finance wants to pitch an idea to a clien t– Analysts prepare the presentation to the client
� Corporate Finance needs to value an acquisition– Analysts value through analysis of previous transactions and forecasting
future cash flows
� Client wants to know how much debt his balance shee t will bear– Analysts run the financial modelling
Sometimes Analysts will attend client meetings but will Sometimes Analysts will attend client meetings but will not usually have primary client contact
© Patrick Fearon 201231 IB Grenoble 201231
These were the most active M&A advisors globally in 2011
AdvisorsRank Value $US
billion 2010 ranking Number of deals
1 Morgan Stanley 636 2 360
2 Goldman Sachs 631 1 355
3 JP Morgan 509 3 285
4 Bank of America Merrill Lynch 387 8 254
5 Citi 367 5 199
6 UBS 347 9 254
7 Credit Suisse 337 4 262
8 Deutsche Bank 293 7 216
9 Barclays Capital 268 6 155
10 Lazard 248 10 216
11 Rothschild 236 11 248
12 Nomura 164 13 187
13 BNP Paribas 143 15 127
14 Evercore Partners 142 14 65
15 Societe Generale 137 28 96
Source: http://thomsonreuters.com.
© Patrick Fearon 201232 IB Grenoble 201232
In the next tier of 15, the advisors are very diffe rent institutions
� The Accountancy firms– PriceWaterhouseCoopers– Ernst & Young– Deloitte and Touche
� The Regional Experts– Enskilda (Nordic)– Mediobanca (Italy)– Santander Global Banking (Spain)
� The Boutique Investment Banks– Greenhill & Co (generalist boutique)– GPKCCW (Financial Services boutique)– Allen & Company (entertainment industry boutique)– Blackstone Group
© Patrick Fearon 201233 IB Grenoble 2012
There are significant regional variations that you should be aware of
AdvisorsGlobal Value $US
billion US rankingEuropean ranking Asian ranking
1 Goldman Sachs 647 1 1 1
2 Morgan Stanley 511 2 2 3
3 JP Morgan 482 3 3 7
4 Credit Suisse 401 5 5 6
5 Bank of America Merrill Lynch 395 4 11 5
6 Citi 383 6 6 2
7 Barclays Capital 327 7 7 16
8 Deutsche Bank 273 11 4 8
9 UBS 261 10 9 4
10 Lazard 250 8 13 N/A
11 Rothschild 224 12 8 9
12 Evercore 166 9 N/A N/A
http://www.politico.com/static/PPM153_bb_080110.html
Announced Deals 2011
© Patrick Fearon 201234 IB Grenoble 201234
M&A volume collapsed in 2007 and is showing clear signs of a double-dip
2007 2008
Worldwide Announced M&A Quarter by Quarter
Source: http://bankerthomsonib.com.
2009 2010 2011 2012
© Patrick Fearon 201235 IB Grenoble 201235
What is the state of Corporate Finance?
The last full year (2011) was weak, particularly in the second half of the year
– M&A deals announced worldwide were up 7% in value in 2011 year on year, but 5% down in volume
– Volume reached $2.6 trillion in 2011 ($2.4 trillion in 2010) but first half volume amounted to $1.5 trillion; second half was $1.1 trillion, down 24%
– Emerging Markets M&A in 2011 reached $667 million versus $806.3 billion in 2010.
– The only really buoyant area was Private Equity M&A, which was up 32% year on year.
– Goldman’s Net Fee Income from M&A was $1.8 billion last year versus $2.1 billion in 2010 (over $3 billion in 2007)
© Patrick Fearon 201236 IB Grenoble 201236
What do you see happening in M&A right now?
� M&A was down 17% in the first 9 months of 2012 versus the same period last year. $ 1.7 trillion versus $ 1.9 trillion for the first 9 months of 2011
� Q1 2012 was the weakest quarter for M&A since the first quarter of 2009 ($485 billion), but Q2 and Q3 were a lot stronger ($626 billion and $552 billion respectively), so maybe we are coming slowly out of the double dip.
� France has been particularly badly hit. New deals completed in the first 9 months of this year were 71% down in value on the first 9 months of 2011.
� Emerging Markets M&A in 2012 has reached US$ 465 billion, a 7% decrease compared to 2011. Now driving 28% of M&A worldwide
� Completed advisory fees were down 22% for the first 9 months of 2012 and totalled $ 11.7 billion
http://online.thomsonreuters.com/DealsIntelligence/Content/Files/2Q10_MA_Financial_Advisory_Review.pdf
© Patrick Fearon 201237 IB Grenoble 2012
Which sectors were active in 2011?
http://online.thomsonreuters.com/DealsIntelligence
© Patrick Fearon 201238 IB Grenoble 201238
The deals announced this year are mostly trade transactions. No major Private Equity deals so far.
Acquiror Target $ billion
1 Glencore Xstrata Plc 48.8
2 FROB Banco Financiero y de Ahorros 23.8
3 Shareholders ConocoPhillips Refining & Marketing 21.7
4 Walgren Co Alliance Boots GmbH 21.4
5 Anheuser-Busch Inbev Grupo Modelo SAB de CV 20.1
6 Electrobel International Power Plc (40.9%) 12.9
7 Nuclear Damage Liability TEPCO (75.7%) 12.6
8 Eaton Corp Cooper Industries Plc 12.2
9 Nestle SA Pfizer Nutrition 11.9
10 Lehman Brothers Holdings Inc Archatone –Smith Trust (26.5%) 11.8
Announced M&A transactions YTD (June 2012)
http://online.thomsonreuters.com/DealsIntelligence
© Patrick Fearon 201239 IB Grenoble 201239
Are Corporate Finance Divisions recruiting?
� In the major investment Banks outside of France, the 2013 Graduate Programme has largely been filled out of the 2012 Summer internship.
� Your best way in is through a Summer Internship in 2013.� Alternatively, look for a 2013 Spring week internship� Within France, the usual route in is through internships.� There are a number of these internships available, but full-time
roles are very selective.
© Patrick Fearon 201240 IB Grenoble 201240
Are Corporate Finance Divisions recruiting?
� Boutiques are recruiting (VTB, Jefferies), but the numbers they recruit are relatively small.
� Some of these boutiques outsource their graduate and internship recruiting to firms such as The Cornell Partnership. www.cornellpartnership.com
� Some firms have difficulty filling their internships in the second half of the gap year. (E.g. Rothschilds)
� Don’t overlook the Transaction Services arms of the Big 4, or Audit.
© Patrick Fearon 2012
Private Equity
© Patrick Fearon 201242 IB Grenoble 201242
What is Private Equity?
� A Private Equity company raises a fund with external investors to make acquisitions (quoted or unquoted) on a leveraged basis
� Time horizon for holding the investment is 3-4 years� Private Equity companies, therefore, compete for acquisitions
with trade purchasers� The funds can be huge. Latest Blackstone fund is $21.0 billion� Which division of a bank does it sit in?
– Asset Management (Morgan Stanley). External Investors.– Equities (Goldman Sachs). It’s the purchase of the shares of a
company.– Separate entity (JP Morgan). It competes with the bank’s clients.
© Patrick Fearon 201243 IB Grenoble 201243
What are the differences between Private Equity acquirers and Public Company acquirers?
� Leverage– The banks were prepared to lend up to 5 times the Private Equity investment– Huge ‘return on investment’– Private Equity companies are paid back before the banks– Leaves the private equity funds free to play again– What would happen if the debt markets dried up?
� Quality of Management– Operating in the Private Sector– Not driven by short-term earnings performance– Private Equity companies can attract top quality management– And they can remunerate management
� They are major clients of the Investment Banks – M&A advisory on both purchases and sales– Equity– Debt– Syndicated loans– Financing and re-financing
© Patrick Fearon 201244 IB Grenoble 201244
How is a Private Equity company structured?
Origination Group
Evaluation Group
FundingGroup
Research
• Usually a senior who liaises with the Corporate Finance departments
• The team that values the target company, and assesses its prospects
• The team that decides on the appropriate mix of senior debt/intermediate and equity and external co-investors
• Back-up to the Evaluation and Funding Groups
© Patrick Fearon 201245 IB Grenoble 201245
The largest Private Equity funds
21
19
18
16.6
15.6
15
15
14.7
11
10.1
9
9
8.6
8.5
8
0.0 5.0 10.0 15.0 20.0 25.0
Blackstone VI
GS Partners VI
KKR
KKR
Blackstone V
Carlyle
Texas Pacific
Permira IV
Blackstone Real Estate
Apollo Management
Warburg Pincus
Thomas H Lee
Cinven IV
GS Partners V
Bain Capital Fund
Targeted Funds ($billion) as at August 2012
Source: Financial Times/Private Equity Intelligence Ltd
© Patrick Fearon 201246 IB Grenoble 201246
Where is the Private Equity industry now?
� Institutions are once again increasing exposure to the Private Equity industry
� New funds are being raised, but they are small� The largest Private Equity purchase in 2011 was the $7.2 billion
purchase of Samson Investment Co. (a US Oil & Gas producer) by KKR
� More than 1,700 deals have been announced this year. The Carlyle Group, in particular, has announced 33 deals year to date worth $16 billion, the highest number of deals it has undertaken since 2007
� Still a large number of work-outs and write-downs in the Private Equity funds’ portfolios
� Many of the larger funds remain unspent
© Patrick Fearon 201247 IB Grenoble 201247
Are Private Equity companies recruiting?
� There is some graduate recruitment but relatively small scale� Private Equity companies tend to be lean, and delegate a lot of
the technical work to bank Corporate Finance departments� For example, KKR employs only 320 people worldwide vs
565,000 employees in portfolio companies and $107 billion of revenues from portfolio companies
� Corporate Finance, Audit and Acquisition Finance are, therefore, the usual stepping stones into Private Equity
� Don’t overlook the mid-sized firms, eg 3i, Candover, Apax, Cinven
© Patrick Fearon 201248 IB Grenoble 201248
Investment Banking involves four main activities
� Corporate Finance– Financial Advisory– Advice on M&A– Private Equity– Debt Capital Markets Origination– Equity Capital Markets Origination
� FICC– Sales & Trading– Research
� Equities– Sales & Trading– Research
� Support Functions– Finance– Compliance– Risk (Market,Credit, Operational)– Audit– Operations
� Skills and Opportunities required in Banking
© Patrick Fearon 201249 IB Grenoble 201249
What does FICC mean?
� FICC refers to the Fixed Income, Currency and Commodites products within
– Sales – Trading– Structuring– Research
� The feeder of the business is the origination of fixed income securities issued by governments or corporates, which is called DCM or Debt Capital Markets.
© Patrick Fearon 201250 IB Grenoble 201250
What asset classes do you find in FICC? How are the product teams split up?
Interest Rate Products
• Flow Products (gov’t bonds, swaps, options)
• Structured products (rates linked notes, complex derivatives – reverse floaters, IR spread options –barrier options, PRDC)
Commodities
• Energy (Natural Gas, Oil, Electricity)
• Metals
• Agricultural Products
Credit Products
• Flow Products (Credit Default Swaps, Corporate Bonds, Distressed or High Yield bonds - Junk)
• Securitized Products (Asset Backed Securities, Mortgage Backed Securities)
• Structured Products (CDO -Collateralised Debt Obligations, CLO –Collateralised Loan Obligations)
• Emerging Markets from BRIC, LATAM, MENA, APAC
Currency Products
• Flow Products (Forex spot, Forex swap, forwards, Forex Options
• Structured products (Forex linked notes)
© Patrick Fearon 201251 IB Grenoble 201251
How is a Fixed Income (FICC) division structured? How is each department structured?
Structuring Origination/Syndication ResearchSalesTrading
• Propose solutions to clients for complex investment or liability management.
- Tax effective products
- Structuring derivative products across all FICC asset classes.
- Complex derivative pricing.
• Underwriting and Placement of new bond issues.
• Prices new issues
• Researches pricing on previous new issues
• Types of bonds that can be issued: Agency Bonds, Corporate Bonds, Distressed debt, government bonds, sovereign bonds, municipal bonds
• Research prepared for clients
• Gives ideas to Sales & Clients (increasingly focused on Clients and working more closely with the sales trading desks to give Clients ideas) as long as not in violation of chinese wall.
• In-house quants model research for valuation and trading of complex derivatives.
• Usually divided into product focus (flow/structured across all FICC products). Flow product sales are usually divided into asset class groups (commodities, credit, rates, but structured products could be sold out of one team).
• Then further divided into Client focus: Corporate clients/Institutional clients (insurance, a m, pf)
• Client Execution
• Market Making
• Proprietary Trading
• Arbitrage (relative value trading, cash and carry,statistical arbitrage.)
• Portfolio Risk Management
Origination/Syndication Trading Structuring Origination/Syndication Trading SalesStructuring Origination/Syndication TradingOrigination/Syndication TradingOrigination/Syndication
Structuring TradingOrigination/Syndication
SalesStructuring TradingOrigination/Syndication ResearchSalesStructuring TradingOrigination/SyndicationOrigination/SyndicationOrigination/Syndication TradingOrigination/Syndication
Structuring TradingOrigination/Syndication SalesStructuring TradingOrigination/Syndication ResearchSalesStructuring TradingOrigination/Syndication
© Patrick Fearon 201252 IB Grenoble 201252
Who are the major originators of international bonds?
Source: http://banker.thomsonib.com/
BookrunnersProceeds
US$ billionMarket share
# of issues
2010Ranking
Barclays Capital 249.0 8.2 627 1
Deutsche Bank 242.5 8.0 903 3
JP Morgan 232.7 7.7 737 2
BNP Paribas 169.3 5.6 515 9
Citi 169.2 5.6 511 6
HSBC 168.8 5.6 568 5
Bank of America Merrill Lynch 164.7 5.4 589 4
UBS 139.7 4.6 424 7
Goldman Sachs 136.0 4.5 388 11
Morgan Stanley 119.0 3.9 413 12
Industry total 3,027 4,788
Eurobond New Issues 2011
© Patrick Fearon 201253 IB Grenoble 201253
Volume of New Eurobond Issues
US
$ bi
llion
Source: http://banker.thomsonib.com/
Bond issuance was down for the second year running in 2011
© Patrick Fearon 201254 IB Grenoble 2012
What is happening in the debt issuance market now?
� Global Debt Capital Markets activity increased by 4% to $2.8 trillion during the first 9 months of 2012 compared to the same time last year, thanks to a strong Q1 and Q3.
� Nevertheless, there is a “flight to quality” going on. Investors are seeking out Government Bonds, Agencies and Investment Grade Debt, particularly Investment Grade Corporate Debt.
� Q2 2012 was particularly poor - global activity at $1.1 trillion was down 50% compared to Q2 of 2011 and compares to $1.7 trillion in Q1 2012. This coincided with real concerns about Greek Sovereign debt default
� Fee income has increased by 15% in the first 9 months of 2012, compared to the same period last year.
� High Yield debt has been surprisingly strong – up 12% year on year, evidence that the hedge funds are back in the market.
� JP Morgan is currently in top spot in league tables.
© Patrick Fearon 201255 IB Grenoble 201255
What is happening in the commodities market?
January 1st 2009 September 1st 2012
Copper $2,825 $7,670
Aluminium $1,412 $1,962
Gold $878 $1,737
Oil (Brent Crude) $45 $114.25
© Patrick Fearon 201256 IB Grenoble 2012
Which commodity divisions recruit MScs?
� The Commodity divisions of the Investment Banks have been big recruiters of MSc. students in recent years.
� All the major banks have been involved, particularly Barclays, Citi and JP Morgan
� They have recruited in Sales, Trading, Structuring and Research, as well as Middle Office functions and Risk.
� Preliminary indications from the Recruiters are that Risk is likely to be the focal point this year.
© Patrick Fearon 201257 IB Grenoble 2012
How are the other asset classes in FICC doing?
� FX
� Rates
� Credit
The main trend is flow or lightly structured products –NOT complex structured products.
© Patrick Fearon 201258 IB Grenoble 2012
Which banks have the largest market share in FX?
http://www.euromoneyfix.com/Article.aspx?ArticleID=2191629&PageID=3594%20%20for%20fx%20info
© Patrick Fearon 201259 IB Grenoble 201259
What would a graduate do in FICC?
� Origination pitches financing to a client– Analysts might do some financial modelling and put the pitch presentation together.
� Sales desk wants to expand– Junior members work with senior members putting term sheets and marketing
presentations together and trying to understand the products. May have some administration email follow up with clients regarding an order.
� Client wants a structured deal– juniors work with the senior structurers often working on term-sheets and complex
pricing simulation to better understand the products.� Trading needs more man-power
– Junior would put together spreadsheets that run risk reports and book trades. Do a lot of spread sheet programming to better capture trading data, including risk parameters.
� Research needs to recruit– Analysts would crunch historical data to analyze market behaviour. Synthesizes
research that a senior member has produced to get ready for distribution.
© Patrick Fearon 201260 IB Grenoble 201260
Are the FICC divisions of banks recruiting?
� There are still plenty of internships, particularly in Sales� Outside of France, the only way into a Graduate Programme is
through a SUMMER Internship.� Even better, try a SPRING internship.� Be aware of the application periods and deadlines. They
normally start in September and end in November, but November is an end date. Often banks are full before then.
© Patrick Fearon 201261 IB Grenoble 201261
Investment Banking involves four main activities
� Corporate Finance– Financial Advisory– Advice on M&A– Private Equity– Debt Capital Markets Origination– Equity Capital Markets Origination
� FICC– Sales & Trading– Research
� Equities– Sales & Trading– Research
� Support Functions– Finance– Compliance– Risk (Market,Credit, Operational)– Audit– Operations
� Skills and Opportunities required in Banking
© Patrick Fearon 201262 IB Grenoble 201262
What is an Equities Division?
� Deals in shares, of course, but also convertibles which are treated as Equity, not Debt
� New issuance drives the marketa. Previous issuers raising additional Equity (“Sec ondary Offerings”)
- to replace debt- to restructure stretched balance sheet- to finance acquisitions
b. First time issuers: IPOs (“Initial Public Offeri ngs”)- worth $164 billion in 2011 globally versus Total Equity Issuance of $617
billion (27% of total)- can be from emerging markets seeking an international investor base
(India, Eastern Europe, China etc) and equity with which to make acquisitions- frequently part of a government’s privatisation programme (e.g. EDF,
Air France, ENEL)- IPOs were up 131% in 2010, driven by Chinese issuance, but
decreased by 40% last year.
© Patrick Fearon 201263 IB Grenoble 201263
The largest IPOs to date (as at June 2012)
Agricultural Bank of China 19.2 October 2010Industrial & Commercial Bank of China 19.1 October 2006AIA Group Ltd 18.5 October 2010NTT Mobile Comms 18.1 October 1998Visa Inc 16.6 March 2008ENEL 17.4 October 1999Facebook 16.0 May 2012General Motors 15.8 November 2010Deutsche Telecom 12.5 November 1996Bank of China 11.1 June 2006OAO Rosneft 10.7 March 2006AT&T Wireless 10.6 April 2000
$ billion Date
© Patrick Fearon 201264 IB Grenoble 201264
The effect is to create institutions with a widely quoted share base
Top Banks by Market Capitalisation (as at January 2 012)
Source: FT
© Patrick Fearon 201265 IB Grenoble 201265
How is an Equities division structured?
StructuringSyndication/Origination SalesTrading Sales Trading and
Execution Services
• Executes sales orders for clients
• Electronic Trading Platforms could include; execution services, algorithmic trading, direct market access (DMA services)
• Underwriting and Placement of new issues.
• Prices new issues
• Researches pricing on previous new issues
• Works with Derivatives team for risk hedging purposes
• Market Making (single stock option/index option trading)
• Proprietary Trading (cash equity,single stock option/index option trading, long/short etc.)
• Arbitrage (merger arbitrage, basket trading,statistical arbitrage and high frequency trading.)
• Portfolio Risk Management
• Stock lending
• Propose solutions to clients for complex investments and capital preservation.
- Tax effective products
- Structuring derivative products including hybrids (ex equity inflation product).
- Complex derivative pricing.
- Sectorial basket structuring –bespoke index products.
• Usually divided into product focus (cash/derivatives).
• Cash Equity Sales/research sales: Interprets Analysts’ recommendations and sells ideas to institutional clients.
• Derivatives sales usually covering institutional clients and selling risk hedging solutions, or capital guaranteed investment products.
© Patrick Fearon 201266 IB Grenoble 201266
Which are the leading houses for EMEA Equities?
All EMEA Equity and Equity Related Issues 2011
Source: http://banker.thomsonib.com/
© Patrick Fearon 201267 IB Grenoble 2012
Outside of the top 10 who are in the top 20 as equi ty issuance advisors?
JP Morgan tops ECM rankings list .
http://online.thomsonreuters.com/DealsIntelligence/Content/Files/2Q10_Equity_Capital_Markets_Review.pdf
11 HSBC
12 UniCredit
13 Nomura
14 ING
15 Société Générale
16 VTB Capital
17 SEB Enskilda
18 Royal Bank of Scotland
19 Mediobanca
20 RMB Holdings Ltd
© Patrick Fearon 201268 IB Grenoble 201268
What kinds of products do you see in the equities division?
Flow
• Single stock
• Block trades
• Single Stock options
• Index options
• ETF’s (Exchange traded funds)
• Convertible bonds
Structured
• Equity linked EMTN (European Medium Term Note)
• Complex Equity Derivatives (eg. reverse convertibles).
© Patrick Fearon 201269 IB Grenoble 201269
Where is the Equities market?
US
$ bi
llion
� New issuance fell by 28% in 2011
� IPOs and Follow-on’s were down across all geographical areas
New Issue Volume, Worldwide
Source: http://banker.thomsonib.com/
© Patrick Fearon 201270 IB Grenoble 2012
How are Equity Issuances doing this year…?
� Global ECM activity was down 14% in the first 9 months of this year.
� Q1 was the slowest quarter in 2 years, down 52% on the same period last year
� IPOs were down 41% on the same period last year� This was despite the $16 billion IPO by Facebook in Q2. As
a result of Facebook, the volume of $42.4 billion for Q2 was double that of Q1.
� Follow-on’s, however, are running at roughly the same level as last year.
� Fees are down by 29%, the lowest level since 2003
http://online.thomsonreuters.com/DealsIntelligence/Content/Files/2Q10_Equity_Capital_Markets_Review.pdf
© Patrick Fearon 201271 IB Grenoble 2012
Which industries were the most active...?
� 5 sectors currently account for nearly three-quarters of activity.
� Financial Issuers were the strongest in overall volume with 24%.� Energy & Power 14%� Materials 14% pie chart� Industrials 11%� High Technology 13%� Real Estate 11% � The remnant was shared by High Tech (8%), Consumer (6%),
Media & Entertainment (4%), Retail (2%), Healthcare (2%) and Telecoms (1%)
http://online.thomsonreuters.com/DealsIntelligence/Content/Files/2Q10_Equity_Capital_Markets_Review.pdf
24%
14%
14%11%
13%
11%
13% Financial
Energy & Power
Materials
Industrials
High Technology
Real Estate
Other
© Patrick Fearon 201272 IB Grenoble 201272
What would a graduate do in Equities – from cash to derivatives?
� Client looks for risk hedging solution for Equity exposure– Sales bring structurers into the deal to create appropriate
structured solutions for the client.� Research needs to get out a report on the European Chemical
Industry– Analyst works with senior industry analysts and evaluates
companies within industry� Sales need to expand client coverage
– Junior sales would be given some small accounts or work with senior sales to make presentations or term sheets.
� Trading needs more man power– Juniors would help senior traders, and might start just with setting
up pricing spreadsheets or risk spread sheets to get them familiar with the products.
© Patrick Fearon 201273 IB Grenoble 201273
Are Equities recruiting?
� It is never as strong an area for recruitment as Debt. ECM and Equity Markets hire relatively few graduates. Both are very competitive areas
� Same process as for FICC. The only way into a Graduate Programme outside of France is through a SUMMER or SPRING Internship
� There are internships with the French and international institutions in both Sales and Equity Research
� Jobs in Equity Research are hard to find. The sector has contracted by about a third in 4 years, and Debt and Equity Research teams are being merged in a number of houses
� Look at institutions with a weak equity presence that are trying to expand, for example Unicredit, Macquarie, MUFJ, Daiwa, Standard Chartered etc.
© Patrick Fearon 201274 IB Grenoble 201274
In the Investment Banking lecture this morning we will be looking at:
� Corporate Finance– Financial Advisory– Advice on M&A– Private Equity– Debt Capital Markets Origination– Equity Capital Markets Origination
� FICC– Sales & Trading– Research
� Equities– Sales & Trading– Research
� Support Functions– Finance– Compliance– Risk (Market,Credit, Operational)– Audit– Operations
� Skills and Opportunities required in Banking
© Patrick Fearon 2012
Support Functions
© Patrick Fearon 201276 IB Grenoble 2012http://www.goldmansachs.com/careers76
How are the Support Functions structured?
ComplianceRisk
Management AuditFinance
• Consists of 3 main risks;
• Market Risk.
• Credit Risk
• Operational Risk
• Reporting into the CFO includes;
• Product Control
• Financial Control
• Management Reporting
• Treasury
• Tax
• Strategy
• Compliance consists of;
• Regulatory risk/ relationships,
• Asset class specialists
• Trade surveillance
• Training,
• Policy
• AML and KYC.
• Provides independent opinions on the firm’s control environment
Operations
• Securities Operations
• Clearing Operations
• Derivatives Operations
• Project Management
© Patrick Fearon 201277 IB Grenoble 201277
Why consider a career in any of the support functions?
� Gives you a broad understanding of the bank’s activities from the beginning.
� Allows interaction with senior leaders from whom you can gain perspective.
� Due to the crisis and tougher regulatory environment, the support functions have gained visibility and power within the organization.
� Lack of high quality senior leader pipe line makes good career possibilities for the future.
� $$$ - senior level support function compensation levels have been rising considerably (outside of continental Europe).
© Patrick Fearon 201278 IB Grenoble 201278
Are support functions hiring?
� With more focus on internal control, all of the support functions are a hiring focus especially market risk management.
� Due to the crisis, the support functions have gained visibility and power within the organization.
� In particular, the Investment Banks are looking for students to work in Risk
YES!
© Patrick Fearon 201279 IB Grenoble 201279
What would a graduate do in the support functions?
� Credit Risk– Work with senior risk managers to analyze ratings and counter-
party risk associated with perspective or existing clients.� Market Risk
– Work closely with traders to make sure portfolios are marked correctly; respect of Value at Risk (VAR) limits, and look at risk factors including stock prices, interest rates, foreign exchange rates, commodity prices, volatility etc.
� Audit– Junior auditors would be sent on missions to verify the firm’s
control environment.� Finance
– Junior product controller would work closely with the traders to make sure that the trades are booked correctly.
© Patrick Fearon 201280 IB Grenoble 201280
In the Investment Banking lecture this morning we will be looking at:
� Corporate Finance– Financial Advisory– Advice on M&A– Private Equity– Debt Capital Markets Origination– Equity Capital Markets Origination
� FICC– Sales & Trading– Research
� Equities– Sales & Trading– Research
� Support Functions– Finance– Compliance– Risk (Market,Credit, Operational)– Audit– Operations
� Skills and Opportunities required in Banking
© Patrick Fearon 2012
Skills and Opportunities in Banking
© Patrick Fearon 201282 IB Grenoble 201282
In all of these departments, there are only 5 roles
� You’re EITHER an Originator of New Business– OR you’re a Product Specialist/deal doer– OR you’re in Research/Analytics– OR you’re in Sales– OR you’re in Trading
© Patrick Fearon 201283 IB Grenoble 201283
In all of these departments, there are only 5 roles
Corporate Finance
Corporate Lending
Loan Syndication
Debt
Equity
InstitutionalAsset Management
Private Banking
Private Equity
Origination Product DeliveryProduct
ResearchSales Trading
Relationship Manager
Relationship Manager
Relationship Manager
Relationship Manager
Relationship Manager
Senior Product Delivery People
Relationship Manager
Senior Product Delivery People
Corporate Financier
Corporate Banker
Loan Syndication Officer
- Structured Products - Syndicate
- Structured Products - Syndicate
Asset Manager
- Asset Manager – Specialist Product
People
Evaluation Team
Analyst/ Researcher
Credit Analyst
Researcher
Research Analyst
Research Analyst
Research
Research Analyst
Analyst/ Researcher
-
-
Asset Salesman
Debt Salesman
Equity Salesman
-
-
-
-
-
Asset Trader
Debt Trader
Equity Trader
-
Client Execution Trader
-
© Patrick Fearon 201284 IB Grenoble 201284
Personality traits needed to work in Banking
� Energetic� Enthusiastic� Team player� Willing to work all hours� Ability to work under pressure� Numerate� Articulate� Innovative� A problem solver� Seeks new ideas� Driven� High performer
© Patrick Fearon 201285 IB Grenoble 201285
Personality traits required for an Originator
� Generalist� Extrovert� A people person� Good at marketing� Good listening skills� Enjoys negotiation� Needs stimulation of varied
deals (may get bored easily)� Creative
Relationship Manager
© Patrick Fearon 201286 IB Grenoble 201286
Personality traits needed as a Product Specialist
� Does not need to be extrovert� More than usually numerate� Good communicator of complex
ideas� Deeply interested in his product
area� Explains product to client in a
way he will understand� Has a clear idea of value (Asset
Manager/Financier)� Advisor
� All the same characteristics, but acts as a Principal not an Advisor, and therefore has a longer-term time horizon than an Advisor. Lives with the consequences of his decisions.
Corporate Financier Asset Manager
© Patrick Fearon 201287 IB Grenoble 201287
Personality traits needed in Product Support/Research
� More than usually analytical� Highly numerate� Good oral and written presenter� Will need to ‘sell’ ideas to
investors and/or internally� Known for original ideas� Likes exploring new sources of
information
� Exceptionally numerate� Capable of being a PhD� Excellent at modelling� Has new ways of looking at
problems� Creative� Likes taking a solution to the
next rung
Researcher Quantitative Analyst
© Patrick Fearon 201288 IB Grenoble 201288
Personality traits needed in Sales & Trading
� Outgoing� Clients trust him/her� Receptive to new ideas� Good at packaging ideas for
client� Will fight the trader to get the
best price for client� Value aware� Will look after the same clients
year after year� Enjoys new product
� Not much external contact� Thrives on pressure� Real feel for value� Could enjoy anything from very
unsophisticated product (spot fx) to very sophisticated (derivatives)
� A risk taker but also someone who will think hard about minimising risk
Sales Trading
© Patrick Fearon 201289 IB Grenoble 201289
But there is good news too…
You don’t need me to tell you that it’s a very difficult marketplace this year
� The recruiters tell us that they intend to recruit in the same numbers as last year
� Investment Banks will still need Analysts and Associates.� In the second lecture we will look at the strategy and stepping
stones you might adopt� But don’t ignore internships and go broad in your choice of
employer� And above all, ensure that you are prepared for the interviews
you are offered
Good luck will come if you are PREPARED!